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Surging Real Estate Creates Opening for FAs

My Mortgage Docs to be Reviewed by an Expert

A recent Wall Street Journal article, which cites CoreLogic data, reported that 21.5% of American homeowners were underwater at the end of the fourth quarter, compared to 25.2% at year-end 2011. The term ‘underwater’ refers to mortgages that have debt values exceeding home values. It can be difficult to refinance a mortgage that is underwater, as many lenders finance less than 80% of the value of a home, although HARP, or the Home Affordable Refinance Program, has helped address that problem with certain homeowners.

The following hypothetic example illustrates how advisors can greatly improve their clients’ financial conditions by helping homeowners assess if refinancing is appropriate.

Assume a homeowner has a $350,000 mortgage with an interest rate of 4.54%. The monthly payment, not including insurance and taxes, would be $1,781. The total interest paid over the life of the 30-year loan would be $292,421.

For the seven-day period ended March 21, the average 30-year mortgage rate was only 3.54%, which would lower the payments on a $350,000 mortgage to only $1,579 and result in $218,613 being paid in interest over the life of the loan. The amount to be refinanced, and resulting monthly payments, may actually be lower, however, if the homeowner had held the original mortgage long enough to have made substantial principal payments. On the other hand, homeowners that roll closing costs into the amount being financed may not see as large of a decline in monthly payments.

If the homeowner lowers the month payment by $200 and invests the savings in a tax deferred account earning 6.50%, the resulting savings would grow to $98,000 in 20 years. Better yet, if a homeowner uses the savings to increase his or her deferral into an employer-sponsored retirement plan that matches contributions dollar for dollar, the savings would grow to $196,172 over 20 years. Clients may also realize tax benefits to refinancing. In the early stages of a mortgage, a large portion of monthly payments are interest payments, which are tax deductable.

Advisors, of course, stand to benefit from more than just increasing the assets they manage by helping to improve their clients’ savings rates. Indeed, by offering to help homeowners evaluate refinancing their mortgages, advisors will illustrate that they are willing to go the extra distance to help their clients reach their financial goals.

With that in mind, advisors should proactively reach out to clients who own homes and offer to evaluate if refinancing makes senses. In the process, advisors should consider a variety of factors, such as the remaining number of payments on a mortgage, interest rates, closing fees and how long a client may want to keep his or her house. The process may also help advisors strengthen their referral network as mortgage brokers may be called upon to help with the process.

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